Q2 2023 US Bancorp Earnings Call
Welcome to the US Bancorp second quarter 2023 earnings conference call. Following a review of the results there will be a formal question and answer session. If you'd like to ask a question please press 1 then 0 on your phone. If you'd like to withdraw please press 1 then 0 again.
This call will be recorded and available for replay beginning today at approximately 11 o'clock a.m. Central Time. I will now turn the conference call over to George Anderson, Senior Vice President and Director of Investor Relations for U.S. Bancorp.
Thank you Brad and good morning everyone. With me today are Andy Cesari, our Chairman, President and Chief Executive Officer, Terry Dolan, our Vice Chair and Chief Financial Officer, and John Stern, Senior Executive Vice President and Head of Finance. During initial prepared remarks, Andy and Terry will be referencing a slide presentation.
A copy of the presentation, our earnings release, and supplemental analyst schedules are available on our website at USBank.com. Please note that any forward-looking statements made during today's call are subject to risk and uncertainty.
Factors that could materially change our current forward-looking assumptions are described on page 2 of today's presentation, our press release, our Form 10-K , and in subsequent reports on file with the SEC. Following our prepared remarks, Andy, Terry, and John will take any questions that you have. I will now turn the call over to Andy.
Thanks, George. Good morning everyone and thank you for joining our call. I'll begin on slide three. The second quarter was highlighted by our successful conversion of Union Bank and a meaningful increase in our common equity tier one ratio to 9.1 percent. 60 basis points higher than the first quarter driven by earnings accretion and balance sheet optimization actions.
Earnings per share totaled 84 cents in the second quarter, including 28 cents per share of notable items. Excluding the impact of notable items, earnings per share was $1.12.
Slide four provides reported and adjusted income statement results and other key metrics. Our second quarter results were supported by new customer account growth and deepening relationships across our business lines as well as continued disciplined expense management.
That interest income was lower compared with the first quarter, primarily due to pressures on deposit pricing, however, momentum in fee income businesses continue strong. One of the strengths of our business model is our diverse and stable funding that includes a mix of both consumer and operational wholesale deposits. This quarter, while our average deposit balance is...
decreased by 2.6% late quarter, period and deposits were higher by 3.2%, or approximately $522 billion, largely reflective of seasonal operational deposit flows in areas such as our corporate banking and trust businesses.
Credit quality metrics remain strong versus pre-pandemic levels, but are normalizing as expected. This quarter, we strengthened our balance sheet by increasing the loan loss reserve reflective of our prudent approach to credit risk management.
Slide five provides key performance metrics.
Excluding notable items, our return on average assets was about 1.07%, and our return on tangible common equity was 22.3%.
Slide 6 provides a summary of our recently completed conversion of Union Bank. Following our main systems conversion on Memorial Day weekend, all credit card, trust and investment accounts were transitioned to our platform in June . Early indications are encouraging and I'm even more confident today of the strategic and financial merits of this deal.
We continue to expect meaningful revenue opportunities and our cost energy targets remain intact. One highlight is the Union Bank customers are adopting our digital capabilities more quickly than expected. As of June 30th, just one month following conversion, we have had over a half a million enrollments in our digital product offerings and this number continues to grow.
Our teams are working diligently to leverage the value of overlaying all of our products and services to Union Bank customers as we continue to provide, and we will continue to provide updates on our progress.
I'll now turn the call over to Jerry who will provide more detail on the quarter.
Thanks, Andy. Turn to slide 7. Our balanced mix of consumer, corporate, and commercial deposits continues to be a key source of strength for the bank.
As Andy highlighted, while average total deposits declined 2.6%, or $13.1 billion on a link quarter basis, we ended the period with $522 billion of deposits, representing a 3.2% increase in ending balances on link quarter.
This quarter, our end of period percent of non-interest bearing deposits declined to approximately 20% from 25% in the first quarter due to both industry dynamics and a change we made to union bank retail accounts at conversion. Specifically, about half of the decline was related to an increase in deposit volumes and mix shift. If you go to Marketolder.com, that's all.
while the other half was primarily driven by a customer-friendly product conversion decision by us.
To create a more positive customer experience, we upgraded Union Bank customers to our interest-bearing Bank Smartly checking product, which offers a better checking solution as well as other benefits. The change will provide customer retention benefits without a material impact.
on our net interest margin.
Given current interest rate volatility and the significant competition for deposits across the industry, we now expect our cumulative deposit beta to be in the mid 40% range by the end of this rate cycle, slightly higher than our previous expectation, but consistent with the deposit pricing dynamics in the industry.
On slide 8, average total loans this quarter were $389 billion, which was flat on a linked quarter basis and up 19.9% year over year.
Commercial real estate loans represent approximately 14% of our total average loan portfolio, with commercial real estate office exposure representing only 2% of total loans and 1% of total commitments. Our office exposure is well balanced among suburban, specialty, and central business districts.
and had a weighted average loan-to-value ratio of approximately 55% at initial underwriting.
Given current macro factors as well as other portfolio considerations, we increase the reserve ratio for commercial real estate office loans to 8.5%.
Turning to slide 9, we reported diluted earnings per share of $0.84 for the quarter or $1.12 per share after adjusting for notable items in the amount of $575 million or $0.28 per diluted common share.
Notable items this quarter included $310 million of merger and integration related charges associated with the acquisition of Union Bank, as well as $265 million related to balance sheet optimization and capital management actions, largely driven by a provision charge of $243 million.
related the securitization of approximately $4.4 billion of indirect auto loans, as well as an additional $4.2 billion sale of Union Bank mortgage loans.
These moves enable us to more effectively position the balance sheet for profitable growth and optimized returns.
Slide 10 provides a more detailed earnings summary for the corridor.
Turn to slide 11.
Net interest income on a fully taxable equivalent basis totaled approximately $4.4 billion, which represented a 4.7% decrease on a linked quarter basis and a 28.4% increase from a year ago due to the impact of rising rates in the acquisition of Union Bank.
Our net interest margin declined from 3.10% in the first quarter to 2.90% in the second quarter which is somewhat lower than expected.
The link quarter decline was primarily due to the impact of maintaining higher cash levels given the debt ceiling concerns and deposit pricing pressures partially offset by higher rates on earning assets.
Slide 12 highlights trends in non-interest income.
Non-interest income increased 8.7% or $219 million on a link quarter basis, driven by higher payment services revenue, trust investment management fees, and commercial product revenues.
Within payment services, revenue increased $112 million on a link-quarter basis, reflecting credit card revenue growth of $62 million, or 17.2%, driven by higher margins and sales volume.
and an increase in merchant processing revenue of $49 million or 12.7% driven by pricing. Also noteworthy were increases in trust and investment management fees of $31 million or 5.3% driven by core business growth.
and commercial product revenue of $24 million or 7.2% driven by strong debt capital markets activity in the corridor.
Compared with a year ago, non-interest income for the company increased $178 million or 1.0% largely driven by higher core fee income.
Turning to slide 13, reported non-interest expense for the company totaled $4.6 billion in the second quarter, which included $310 million of merger and integration related charges.
Non-interest expense, as adjusted, decreased $52 million or 1.2% on a linked quarter basis.
Slide 14 shows credit quality trends which continue to be strong from a historical perspective but are normalizing as expected.
The ratio of non-performing assets to loans and other real estate was 0.29% at June 30th compared to 0.30% at March 31st and 0.23% a year ago. Our second quarter net charge off ratio of 0.35% as adjusted.
increased five basis points from a first quarter level of 0.30% as adjusted, and was higher when compared to the second quarter 2022 level of 0.20%.
Our allowance for credit losses as of June 30th totaled $7.7 billion or 2.03% of period loans.
Turning to slide 15, we accelerated our capital actions and ended the quarter with a CET1 total ratio of 9.1%.
The 60 basis points linked quarter increase in the CET1 ratio reflected 20 basis points of earnings accretion, net of distributions, and an additional 40 basis points attributable to risk-weighted asset and other balance sheet optimization initiatives with low to neutral earnings impact. The 60 basis points linked quarter increase in the CET1 ratio reflected 20 basis points
During the quarter, we received the results of the Federal Reserve's 2023 stress test and we expect to be subject to the minimum stress capital buffer requirement of 2.5%, which is unchanged from last year. Despite this year's more stressful economic scenario, we expect to be subject to the minimum
and an additional $1.4 billion of merger-related charges with limited recognition of cost energies related to Union Bank.
I will provide third quarter and updated full year 2023 forward looking guidance on slide 16. I will provide third quarter and updated full year 2023 forward looking guidance on slide
starting with third quarter 2023 guidance.
We expect net interest income of between $4.2 and $4.4 billion in the third quarter.
Total revenue as adjusted is estimated to be in the range of $6.9 to $7.1 billion, including approximately $75 million of purchase accounting accretion.
Total non-expense as adjusted is expected to be approximately $4.3 billion, inclusive of approximately $120 million of core deposit and tangible amortization related to the Union Bank acquisition. For more information, visit www.fema.gov
Our income tax rate, as adjusted, is expected to be approximately 23 to 24 percent on a taxable equivalent basis.
We expect merger and integration charges of between $150 to $200 million in the third quarter.
I will now provide updated guidance for the full year.
For 2023, net interest income is expected to be in the range of $17.5 to $18.0 billion. Your revenue as adjusted is now expected to be in the range of $28.0 to $29.0 billion.
Inclusive of approximately $330 million, a full year purchase accounting accretion.
Total non-trans expense as adjusted for the year is expected to be approximately $17 billion, inclusive of approximately $500 million of core deposit intangible amortization related to Union Bank.
We continue to expect to have $900 million to $1 billion of merger and integration charges in 2023, and total merger and integration costs of approximately $1.4 billion, consistent with earlier guidance.
I will now hand it back to Andy for closing remarks. Thanks, Terry. I'll finish up on slide 17. The strength and stability of our balance sheet remains a differentiator for our company, and these metrics indicate, as these metrics indicate, we are well capitalized and prepared for a potentially more challenging economic environment given our strong liquidity, diversified business mix, and our long-term impact on our economy. We are also prepared to continue to work with our partners to ensure that our business
and consistent and disciplined approach to credit risk management.
Building capital remains a top priority as we prepare for Category 2 designation, and we are confident in our ability to execute on our strategic growth opportunities and key initiatives. Following the successful conversion of Union Bank this quarter, we enter the second half of the year well-positioned as a national banking franchise with increased scale, broader reach, and meaningful revenue growth opportunities provided by the addition of 1.2 million new consumer and small business customers.
as we head into 2024.
Let me close by thanking our employees for all that they do to help provide exceptional service that makes us a destination of choice for our clients and a valued partner to all our stakeholders. We will now open up the call to Q&A.
We will now begin the question and answer session. If you have a question, please press 1, then 0 on your phone. If you wish to be removed from the queue, please press 1, then 0 again. Once again, if you have a question, please press 1, then 0 on your phone.
We'll first go to Scott Seifers with Piper Sandler. Please go ahead.
Morning, Scott.
Hey, I was hoping maybe we could start out with a couple thoughts or expand the thoughts on capital. Maybe just sort of a refresher anticipated capital builds from here especially in light of just how quickly you just how quick the pace was in the second quarter and then you know ideally sort of what you're targeting presumably under Category two rules and when when you might get there in in your view
Yeah, thanks, Scott. I think that we ended up at 9.1% CET1 at the end of the second quarter. Our expectation now through the rest of this year is that we'll be at least at 9.5% by the end of the year. That's going to be a function of earnings accretion, net of distributions, as well as some continued earnings and toll rates depending what year the order date is different. You can achieve low deadlines, Right. And look at trend, there are some competitors you can imagine consider. You have a thousand deadlines but many. Right.olt or after lust.
actions from a risk weighted asset perspective. You know, we had originally articulated about 50 basis points of risk weighted asset optimization over kind of the two year time horizon. We felt like we could accelerate that a lot because the vast majority of them were, you know, what I would call low to neutral impact on.
a game plan in order to be able to get to at least nine and a half by the end of this year and to be in a position to be able to fully adopt category two by the end of 2024 if necessary.
Okay. All right. Perfect. Thank you. And then maybe a question on the deposits. Appreciate all the commentary on the non-interest-bearing runoff being, I guess, about half driven by the product change as you integrated Union Bank customers. But just given the sort of the optics of it, just curious about any thoughts.
Is that pretty much done or would you expect for the broader or entirety of the firm could NIB balances still continue to flow out just in light of where interest rates are and where would you see those flushing out maybe as a percent of total deposits? Hey Scott, this is John . I wasn't sure what you think.
You know in terms of the DDA mix, you illustrated that correctly, we moved about 15 billion of deposits over into the bank smartly interest checking product and so that gets us to about a 20% ratio. We think that that's about where we land here. It will be plus or minus of course as we kind of go through the quarters but we think that we're at a...
guidance of the 17.5, 18, beyond the non-interest bearing mix commentary that you just provided, can you also help unpack that guidance in terms of overall deposit growth expectations as well as maybe the margin assumption behind that and low growth as well if possible. Thanks.
Sure, this is John again. So a couple things I would say maybe just to provide additional context. As you saw in our results, we saw a big increase in our deposits, up 3%, on a period ending basis to $522 billion.
And then we had with as Terry mentioned about our capital actions, we had loans drop a start point of about 2% given the auto and the mortgage sale that we talked about within our comments. And so as I think about those things, you know, we will have the ability to be a little bit more disciplined and moderate in our deposit pricing as we as we go forward given that.
bringing on cards and less in mortgage and auto. So those are kind of the puts and takes to how we came up with the net interest income guidance. And then I think you made a comment about deposits there as well and I can just touch on that. You know, I think on deposit side, we would, even though we had a large seasonal uplift as typical...
of things that are headwinds for deposits in the industry.
And the other thing I would just mention, John , you asked a question regarding our expectation.
Now, just kind of looking at the market implied.
rate environment is that NIM is probably down a few basis points in the third quarter and then relatively stable through the rest of the year.
Got it. No, thank you. That's very helpful. And just lastly, the confidence in your through-cycle deposit beta of about 40% looks like, you know, we have a number of banks that are trending to the high 40s and into the 50s. You know, just what gives you the confidence in that through-cycle beta expectation of around 40.
Yeah, so we're looking at, you know, we're coming, our calculations shows that about 39% in the current beta and we were indicating, you know, mid-40s is where we'll land. And you know, I think it just goes back to some of the things that we talked about earlier where we did have a big flight in of deposits. We think.
Well, we have loans that have come down given the capital actions, and so that gives us a little bit more flexibility with pricing. But of course there will be pressure as it relates to deposit betas just as we go through it. But all that is kind of baked into our mid-40s guide. Okay, great. Thank you.
It's obviously a big topic. As we think about future RWA optimization, I think you mentioned some of the low-hanging fruit, I guess things that were EPS neutral. It seems like you executed on those this quarter. As we look forward to, I think you mentioned some action in the back half, some into 2024. How punitive are those going to be in the outcome of this year's liberal Hindu revolution with RWA? Hopefully not because how we Try not to love that! But, we always ask that people be creative and being honest
But give us a sense of the EPS hit from these actions, and how much more of our optimization should we think about between now and let's say year 24.
Yeah, great question, Abraham. So let me maybe unpack it a little bit in terms of the different types of actions that we are likely to take. You know, one is an example is we're going to be kind of winding down a cash provisioning of business.
So that'll have very minimal impact from an earnings perspective because it's not that big of a business, but it is a pretty significant user of capital in terms of risk weighted assets. So, you know, that's one area and one example of you know, how we still think that there's you know, low to neutral sort of opportunity in terms of enhancing.
or improving the risk-weighted asset position. We'll continue to be focused on reducing our MSR, our mortgage servicing right portfolio, over the course of the next several quarters. That's an area that, again, it has some impact, but it's not significant. And probably more importantly, it allows us to rebalance the size of the mortgage exposure, mortgage portfolio relative
There's just a number of other things, similar sort of structures that we've done. But the other thing that we're working on between now and the end of the year, which will kind of position us well to be able to continue to improve on a risk-weighted asset basis is setting up some securitization programs related to some of our other balance sheet positions.
That's helpful. And just one follow-up. Strategically, I think the one question is, this environment should be ideal for USB to take market share. Competitors are under pressure. Clearly, your balance sheet is holding up quite well. Give us a sense of just how much of a constraint capital levels are today.
as you think about getting new customer growth, picking up market share, maximizing the union franchise, just how much of a restrictive factor capital is to accomplish all of those.
Yeah, go ahead, Andy. Go ahead. So, I wouldn't say it's a constraint. We're focused on profitable growth. We have a diverse set of business products and services that allow us to grow in a capital-efficient way. I mean, I'll give you a couple of examples. The Union Bank customer base, about 80% of the consumer small businesses are single-service customers. Their penetration on credit cards is about half what ours is across the legacy U.S. banks.
based sort of businesses which are capital efficient, as Andy said.
Thanks for taking my questions.
And next we'll move to Ken Ousden with Jeffries, please go ahead.
Ken Oosten with Jefferies. Please go ahead.
Hey, good morning guys. Hey, a really good fee result this quarter. I just wanted to ask you as I'm looking at the payment slide on page 19, it does look like the year over year growth rates did all slow versus the first quarter. Can you just talk about what's going on across the payments with regards to...
Just where the consumer is and how you expect corporate spending to trend as you look ahead given the potential for a slowing economy. Yes, and of course that's the $100,000 question is whether or not we actually move into a recession or not. But I think broadly from a macro perspective some of the things that we're seeing is that we pay much more attention toooks than consumers budget is and move towards revenue in the jwNET or early childhood income. We see like bad news today is going to be this is what makes us effective than pay more or less for people that like it. It's going be make lower income families from stock abst scandal overakuestion. So, shirt commented were the third option to maybe, make more out ofiage, sometimes
spend starting to normalize and soften, if you will. I mean, yesterday was retail sales information that came out a little bit softer than maybe expected. We're seeing some of those same dynamics in the payments business, you know, where sales, you know, for example, in the...
in the merchant side of the equation, you know, slower, softer sort of retail sales. But you know, there's still a fair amount of travel expenditure that's taking place. So customers are certainly choosing and maybe being a little more choosy as to where they're spending their dollars.
Some of the dynamics that we're seeing is while sales have softened maybe a bit, the margins in some of the businesses have actually improved. So on the credit card side of the equation where sales have come down a little bit, the margins are actually a little stronger. On the corporate payment side of the equation, margins continue to get stronger because T&E
range on the credit card fee revenue still in that mid single digits. And you know, the on the corporate payment side of the equation, it'll normalize but it'll kind of normalize in that high single digits range. That's kind of what we're seeing, what we're kind of forecasting at this particular point in time based upon consumer behavior. Got it. And one follow up on capital.
Can you just give us, just so we all have the right number from your perspective, where CET1 was this quarter inclusive of AFS unrealized losses and also just your view of if rates stay the same here, what that pull to par looks like as you look forward to that year-end 24-point? Thanks. Yeah. So if you were to embed the AOCI into the CET1 calculation...
have the the AFSPs of what does pull to par by the end of the year because it's hard for us to understand how much the risk weighted asset part might be but at least we can kind of track to your view of the portfolio maturity. Yeah do you have that John ? Yeah so in terms of the burn down between here and the end of 24 it's about 25% or so. Okay got it thank you.
Next we can go to Erica Najarian with UBS. Please go ahead. Hi, good morning. I need to ask a capital question again just because it's been such a big deal for your stock. And I'm wondering if you could indulge me in some sort of cave woman's math here.
6.9% CT1, you have six quarters to generate capital. Based on what you're earning today, you could add another 120 basis points for six quarters times 20.
and that'll get you to 8%. So given that you've mentioned both Terri and John throughout the call, some additional RWA actions, how much can RWA actions enhance that potential for 8%?
fully loaded CET 1x4 to 24, you know, just on earnings. How much can you add from RWA mitigation?
Yeah, so maybe just kind of unpacked in a little bit, you know, we still expect, Erica, that you know, our the benefit from capital accretion or earnings accretion is going to be somewhere in that 20 to 25 basis points on average and you know, a couple of different things to kind of keep in mind while there's a little more pressure.
on the revenue side of the equation, the things that will start to come into the equation is a lot lower merger and integration charges next year. We'll be substantially done with that, as well as the fact that by the end of the year, we will really be at kind of full run rate from a cost-energy standpoint. So I think that there's...
a number of things just in terms of why we feel confident that that accretion level starts to accelerate or creep up from where we're at today.
And then I think when you end up going through, John talked a little bit about the burn down being at about 25% between now and the end of the year and that's based upon market implied. But also keep in mind, as we have said, we have put into place some hedging strategies to protect us from the upside risk that might exist if rates were to move up. So we feel pretty good about that.
you know, where that is going to come in. And then the rest of it is really tied to, you know, risk weighted asset actions, many of which I ended up talking about. And again, we have a, we have a pretty confident game plan with respect to our ability to reduce risk weighted assets in order to be able to achieve.
the targets that we need to hit. Let me just ask it another way again, just because it feels like some of the good stuff that's going on in the company is being ignored because of this capital question regarding category two. You know, based on your outlook.
and under a reasonable range of scenarios for the economy, do you think you could get to 8.5-9% fully loaded CET 1x4 Q24?
Yeah, absolutely. Thank you. And next we can go to John McDonald with Atomic Research. Please go ahead.
Thanks, Terry. Yeah, just one last follow-up on that walk, starting from the 6-9, getting to 8.5 to 9. So is that the idea that...
The ARCI is kind of like a 200, 210 basis point drag today, and that'll shrink to, in your numbers, something like 150 or that kind of drag by the end of next year? Yes.
Okay. And does your walk include like FDIC assessment and CECL phase-in, things like that? Yes. Okay. The next question was just on credit. How do you see charge-off trajectory from here? I know you've said normalized 50. You won't get there for a while. But the jumping off point is 35.
end of the year or early next year and then it kind of normalizes around 50 basis points once we get into 2024.
Okay, got it. And does the full year guidance on expenses for this year incorporate some achievement of merger saves in the fourth quarter of this year? In terms of cost energies? Or? Yeah, absolutely. Absolutely. It gets us to the run rate, John , of the full 900 by the end of the quarter.
So when we get into 2024, we will have achieved a full run rate of $900 million of cost energies. And you will have achieved most of those by the fourth quarter of this year? By the end of the fourth quarter, yep. Okay, and that's built into the guidance for the full year this year? Yes.
So when we get into 2024, you know, we will have achieved a full run rate of $900 million of cost energies. And you will have achieved most of those by the fourth quarter of this year? By the end of the fourth quarter, yep. Okay, and that's built into the guidance for the full year this year? Yep. Yes.
When we get into 2024, we will have achieved a full run rate of $900 million of cost energies. And you will have achieved most of those by the fourth quarter of this year? By the end of the fourth quarter, yep. Okay, and that's built into the guidance for the full year this year? Yep, yep. Yes. Okay, thank you.
Thanks, John . And we can go to Chris Kitowski with Oppenheimer. Please go ahead. Yeah, I think last quarter you shared that the average duration of your securities portfolio went down from like 4.3 to 3.8 years or something like that. And I wonder if you could give us the similar trend in the second quarter and the outlook for the balance of the year and just your philosophy.
down a little bit, not measurably, but down a little bit from there. Our game plan, I guess, is that we're going to continue to work on shortening the duration of the AFS portfolio. And it kind of helps us de-risk that. We will keep more in the game plan.
in short term sort of securities, whether it's that or cash, but it'll be kind of a combination.
And on the HTM portfolio, is there a similar kind of move to shorten duration or are you comfortable where it is? Yeah, well with respect to the HTM portfolio, that's just kind of going to run down over time or burn down over time. We're not adding to the HTM portfolio at this particular point. Okay. Alrighty, great. Thank you. Thank you.
And we'll move to Vivek Junaidjo with JP Morgan. Please go ahead. Sorry, it's repetitive, given the multiple calls. So I guess a couple of things on merchant processing.
to June and Joe with JP Morgan. Please go ahead. We'll be back. Sorry, I've been repetitive given them multiple calls. So I guess a couple of things on merchant processing any color on
Why it's up only 2% year-on-year in terms of fees? I hear you on the travel slowing, but that's also a lower fee. What's caused such a sharp slowdown and what turns that around to the mid-single digits, Terry?
Yeah, some of its year over year, you know, comp and how it'll kind of play out. But you know, the biggest driver of a vacuum the merchant processing at this particular point is the fact that you know, the travel airlines specifically is continuing to become a higher portion of the overall mix.
You know, that we think is starting to stabilize. In other words, much of that growth has been in the airline space, but we think that that kind of stabilizes. Airline happens to have a lower margin, and so that's the dynamic that you're seeing.
Okay. And OCI, your loss seems to have gone up. Did you not get any benefit from the hedges you put on or is there something else going on underneath? Yeah. I think the investment portfolio is AOCI went declined or the mark declined by about 200
I think with the hedges that we have put in place that helped mute that, it could have been higher. We continue to add hedges across that portfolio and pick our spots when we see rates fall.
Thank you. And we'll go to Gerard Cassidy with RBC. Please go ahead.
And we'll go to Gerard Cassidy with RBC.
Good morning gentlemen. Terry, you talked a bit about a normalization in the charge-offs moving into 2024. Can you share with us what kind of assumptions you're using to get to that normalization rate in charge-offs, both economic and just, you know, the way the customer base may behave?
You want to talk about that? From an economic standpoint, Gerard, I'll start. This is Andy. We think there's probably a fairly equal weight probability that we'll either see a soft landing or a mild recession. And if we do get a recession, our models would indicate it would be short and shallow, either late this year or early in 2024. And you know there's still pricing pressure and the inflation's not solved, so we have one more rate hike by the end of the year, modeled in.
And then, but on the other hand, as Terry mentioned, you know, excess savings has come down significantly and consumer spending is slowing. So the Fed is getting its desired outcome. So big picture, we think the Fed's close to being done. And as I said, sort of this probability of either shallow and soft, or mild recession and or a soft landing is what we've modeled in to get to those assumptions Terry's articulated.
A couple of things I would just add maybe from a portfolio dynamic perspective. We're seeing nice growth in terms of credit card balances. As credit card balances both increase and it normalizes, you'll start to see that ratio going up because that's a little higher mix for us.
And then I think it may be somewhat lumpy but it's kind of incorporated into it as just you know continuing to work through commercial real estate office space you know over the course of the next few years.
Very good. And then I apologize if you address this question, but with the expectation of the Basel 3 end gain capital requirements coming shortly, and this week the disclosure is that it seems like residential mortgages may be exposed to higher risk weighted assets.
How are you guys thinking about that in terms of risk of RWA strategies if mortgages do get a bigger weight and other areas are greater than expected?
Yeah, well certainly, you know, a lot of our actions, for example, with respect to mortgages and that particular business is just continuing to de-risk, so to speak. So we're kind of trying to take that into consideration. Our expectation right now, Gerard, is that it's probably going to be...
fairly neutral to maybe just a little bit of a benefit based upon everything that we're seeing in terms of the end game. But we really have to wait and see what the final rules say, and then apply it to our specific portfolio.
Thank you, Terry. Thank you, Andy. Thanks. Sure.
And next we go to Betsy Grefik with Morgan Stanley .
Good morning Betsy. Hi good morning. Just a couple of quick follow-ups. One, the asset sales that you did this quarter, was that at the beginning of the quarter or the end? I'm just trying to understand how much like revenue from that portfolio you have in 2Q.
Yeah, most of them were completed closer to the end of the second quarter, so in the June timeframe. Okay. And then the revenue outlook for the full year, is that based on June 30 balance sheet or is that also including the RWA actions you're planning on taking between now and year-end.
of the closer to the end of the second quarter so in the June timeframe. Okay and then the revenue outlook for the full year is that based on June 30 balance sheet or is that also including the RWA actions you're planning on taking between now and year end? Both. Both are rollback.
It incorporates our capital actions in terms of what we expect to execute on between now and the end of the year. Okay, got it. All right. Okay. Thank you. That's it. Betsy. And next we can move to Mike Mayo with Wells Fargo Security. Please go ahead.
It incorporates our capital actions in terms of what we expect to execute on between now and the end of the year. Okay, got it. All right. Okay, thank you. That's it. Betsy. Next, we can move to Mike Mayo with Wells Fargo Security. Please go ahead. Mike?
Hi, well on the capital issue, I asked last quarter do you think there's any chance that you
need to raise capital or cut the dividend. I'll just ask Janet or what I mean people were doing these these mechanistic analyses where they would take the generalized securities losses, reduce that from tangible equity, give you no credit and then say you would need to raise capital. So now that you've met your year-end capital target, you can raise capital.
I guess would you reiterate or to what degree would you reiterate no capital increase, no dividend cut? And in addition, if you could put in a broader context, the vice chair of the Fed, Barr last week said that actually the economic value of equity of banks goes up because of higher value of deposits. So it seems like he...
it's signed on to a lot of the analysis that we analysts do. So just if you could comment on the bigger picture about your capital and the flexibility there.
The yield curve is a lot more inverted. I guess competition has picked up more than expected. What inning do you think you're in in terms of this downward revision for NII? Do you think you're kind of there now? Could he've Jumped a little bit before as he said?
And as you exit the year, do you think you maintained that third quarter level? I think you said NIM would be flat after that, but I'm not sure if you mentioned NII. So is the downward revision for NII done, or eighth inning, seventh inning? And what does that mean for run rate going to next year?
Yeah, so again, obviously you heard the guidance with respect to NII and NIM, we expect it to be a few basis points down in the third quarter and then relatively stable from there. Obviously this is rate, excuse me, it's Fed policy kind of dependence, so we're trying to look at what the current environment looks like. In outlined
We feel like, you know, if I had to kind of put, you know, what inning are we in where I think we're in the late innings, simply because of where the Fed is from a monetary policy standpoint. So while there may, you know, continue to be a little bit of downward pressure, you know, we don't see it as being, you know, significant from here. Andy, what would you add? You know, Mike, the other thing I'd add is I think one of the benefits of our business...
on margin.
Thank you.
And next we have a follow-up from John McDonald with Autonomous Research. Please go ahead.
Hi, Terry, thanks. One more on the mitigation and optimization opportunity. Originally, you talked about 50 basis points of opportunity to harness this year. Obviously, you got 40 this quarter. And now it sounds like the total is more. Is there a way to size how much more you might see out there between the remainder of this year and next year?
relative to the original 50 you were targeting? Yeah, you know, again, the 50 that we were targeting, we knew we had a high level of confidence in terms of being able to achieve it because there were low to kind of neutral impact, and they were things that we could kind of execute on. We definitely believe that as we get into 2024, the standing up, which obviously takes a little longer, standing up of securitization programs.
And many of the actions that I talked about earlier, gets us to where we need to be from a capital perspective when you take into consideration the burn down, et cetera. So, that opportunity I think is, you know.
Certainly, probably in line with another 50 basis points would be my guess. Okay. And when you say no impact or low impact, we did see some this quarter, like in terms of the charge offs and taxes, I guess they're not run rate. Is that what you mean? But like you could have episodic one quarter type impacts? Absolutely. We'll continue to see that as we read.
Yeah, well, it'll be fully adopted. It'd be roughly 8.5%, 9%. OK. Thank you. And we have no further questions at this time. I'll turn it back to George Anderson. Please continue.
Thank you for listening to our earnings call. Please contact the Investor Relations Department if you have any follow-up questions. And this concludes today's conference. Thank you for participating. You may now reserve your!!!
listening to our earnings call please contact the Investor Relations Department if you have any follow-up questions. And this concludes today's conference. Thank you for participating. You may now disconnect at this time.
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